Category Archives: HROI

Next month is my condo closing (knock wood), which means that about a week from now I’ll be making my last mortgage payment on the place. Oh, and my last assessment, last tax escrow payment, last PMI payment… all told, that’s $2700/month that I’m paying now but won’t be paying come October. And as annoying as it’s been to be making these payments on a vacant condo, I’m fortunate to have a job that pays well enough for me to make that payment along with all my other bills and expenses.

So the thought of this money coming in is really seeming like quite a windfall, and I’ve been brainstorming fun ways to spend it. It really hits me that it’s a lot of money when I look at what else I could do with this money every month:

The nail salon near my home charges $35 for a pedicure. With a 20% tip, that’s $42. With $2700 every month I could get two pedicures a day, every day. A pedicure is the ultimate indulgence for me, so this actually sounds tempting!

A flight to Europe even in peak tourist season is under $1000. Add 6 nights in a hotel at $200/night and give me a $500 food/museum budget for the week and that’s a one-week vacation to Europe every month. Of course, I wouldn’t have a job after a couple of months of doing this, and there goes the $2700.

Ever read a shelter magazine, like Martha Stewart Living or Architectural Digest and marvel at the flower arrangements in the rooms that look to comprise about 1000 roses and hydrangeas? I’ll bet $650 would buy a pretty nice flower arrangement every week.

How could I forget the “latte factor”? If a soy latte is around $4, let’s be generous and leave a tip for an even $5, I could have 17 lattes a day! (Better make some of those decaf.)

Well, you get the idea. But believe it or not, the point of this post isn’t to brag about how I’m going to be living large in a couple of months. Because, actually, I’m not going to be doing any of that stuff. The point of this post is that fantasizing about spending money is very different from actually having the money in hand and deciding where it will go.

My financial goals are longer-term. What I really would like to do is get my student loan debt paid off, so that I no longer feel locked into my well-paying, but unfulfilling, job. As much as I like the idea of endless flower arrangements, the appeal would wear off every time my student loan statement came in the mail. So almost all of this “extra” money will go towards aggressively paying down my debt.

But it doesn’t have to be all-or-nothing. What if I set aside a few hundred dollars of the $2700 for smaller versions of the indulgences listed above? If I put $2000 to my student loan debt, I would still have money left over for one pedicure a week, a modest bouquet of fresh flowers every week, a latte a day, and, say, $350 to go in a savings account towards a vacation at the end of the year. And all that would still feel really luxurious, without all the guilt.

There’d still be some guilt, though; $700 is still a decent chunk of change. But it would allow me to pay down my debt quickly (if not as quickly as possible) while still retaining some of that “windfall” feeling. This is all still talk, at this point. We’ll see what I do when I have the bird in the hand.

An important ratio in finance is the return on investment (ROI), which is, of course, the amount of money gained (or, sometimes, lost) relative to what you put in. When you’re talking about finance, you’re talking about exact dollars, and the formula is precise. But I think the concept behind ROI can be applied to spending that will yield intangible gains as well. (Now, I usually bristle when I hear people talking about “investing” in a depreciating asset like a high-end dishwasher or a nice pair of shoes, so I’m breaking my own rule here. Just this once. For now.)

The concept here is simple: Whenever you’re considering a purchase or expenditure, take a moment to consider whether it will make you a happier person or a better person or a more interesting person. If it won’t, that’s a strong argument for walking away. Unlike the finance ROI, what I’ll call the “Happiness ROI” is impossible to quantify, but you can break things down into rough categories:

High HROI: This, of course, would be things that don’t cost much (if anything) but improve your life a good measure. Examples might be an afternoon at a museum, happy hour with friends, a subscription to a news magazine. Everyone’s list will be different, but if you assess something as having a high HROI, don’t hesitate to spend the money.

Medium HROI: This category might include things like travel, tickets to the symphony, and gifts (including charitable donations). These things are also very good for you, but cost a lot more. Medium-HROI expenditures may have to go into the budget and you may even have to save up for them (I’ll detail my own means for saving for travel in a future post), but they’re probably worth it if you can make the room.

Low HROI: This speaks for itself. I think most consumer purchases–purchases of things rather than experiences–fall under this category. An unnecessary new gadget, a pretty dress, an HDTV–none of it is exactly character-building. That’s not to say that you should never buy these things (I confess I’ve bought all of the above within the last year), but these are the purchases you should think hardest about. This is the time to ask yourself what you’re giving up to make the purchase. Maybe you’ll have to give up something like a day of vacation or a bit of your retirement fund, or you’ll have to wait an additional month to be debt-free. Is it worth it?

Finally, there’s a whole other category of spending that doesn’t fit into the HROI analysis: Necessities. These you have to buy no matter what, and should budget for (and have an emergency fund available for the big stuff). It doesn’t give me a warm fuzzy feeling to buy toothpaste or write a check to the plumber, but it has to be done.

My philosophy about spending is not to scrimp and save every last dime, but to be mindful of what your spending is doing for you. Scrimping can be destructive, for instance, if you are continually turning down your friends’ invitations because you don’t want to spend $10 on a couple of drinks. Spending can also be destructive, if you are turning down your friends’ invitations because you spent your last $10 on lottery tickets. Sticking mostly to purchases with a higher HROI will allow you to live well and still meet your financial goals.